CONSOLIDATED ANNUAL REPORT

Transcription

1 JOINT STOCK COMPANY OLAINFARM (UNIFIED REGISTRATION NUMBER ) CONSOLIDATED ANNUAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2006 (10 th financial year) PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS TOGETHER WITH INDEPENDENT AUDITORS REPORT Olaine, 2007

2 Consolidated annual report 2006 Auditors report 2

3 Consolidated annual report

4 Consolidated annual report 2006 CONTENTS General information 5 Consolidated management report 9 Consolidated income statement 14 Consolidated balance sheet 15 Consolidated cash flow statement 17 Consolidated statement of changes in equity 18 Notes to the financial statements 19 4

5 Consolidated annual report 2006 General information Name of the Parent Company Legal status of the Parent Company Unified registration number, place and date of registration AS Olainfarm Joint stock company Riga, 10 June 1991 (re-registered on 27 March 1997) Registered office Rūpnīcu iela 5 Olaine, Latvia, LV-2114 Major shareholders SIA Olmafarm (49.51 %) A.Čaka iela 87 Riga, Latvia, LV-1011 Juris Savickis (31.23 %) Board Valērijs Maligins, Chairman of the Board (President) Positions held in other companies: SIA New Classic Board Member, SIA Aroma Chairman of the Board, SIA Olmafarm Managing Director Participation in other companies: Latvian Academic Library Foundation (SO Latvijas Akadēmiskās bibliotēkas Atbalsta fonds), SO Vītkupe, Nature Restoration Foundation, SIA Remeks Serviss (33%), SIA Olfa Press (45%), SIA Carbochem (50%), SIA Aroma (100%), SIA Olmafarm (100%), SIA New Classic (100%) Jeļena Borcova (appointed 30/07/2006) Positions held in other companies: SIA Carbochem Chairperson of the Board Participation in other companies: none Jurijs Kaplinovs, Deputy Chairman of the Board Positions held and participation in other companies: none Aleksandrs Černobrovijs Positions held in other companies: SIA Carbochem Board Member Participation in other companies: none Andris Jegorovs Positions held and participation in other companies: none 5

6 Consolidated annual report 2006 Viktorija Žuka-Ņikuļina Positions held in other companies: SIA V.E.D. Chairperson of the Board, public non-governmental organisation Baltijas Juristu perspektīvas Board Member Participation in other companies: SIA V.E.D. (100%), public non-governmental organisation Baltijas Juristu perspektīvas Inga Liščika Positions held and participation in other companies: none Armands Lapiņš (resigned on 30/07/2006) Positions held and participation in other companies: none Council Juris Savickis, Chairman of the Council Positions held in other companies: The Latvian Tennis Union (unregistered office), AS Sibur Itera, Chairman of the Council, AS Latvijas Gāze, Deputy Chairman of the Council, AS VEF banka, Deputy Chairman of the Council, SIA Itera Latvija, Chairman of the Board, AS Nordeka, Deputy Chairman of the Council, SIA Islande Hotel, Member of the Board, Tennis club Altitūde, Chairman of the Board Participation in other companies: SIA Islande Hotel (75.31%), SIA Daugmala (100%), SIA Energo SG (50%), SIA Nordeka Serviss (100%), SIA Palasta nami (100%), SIA Elssa-SIA (55%), Company of apartment owners Četri pluss (20%), SIA SMS Elektro (34%), AS Latvijas Krājbanka (1.02%), SIA Hominus (25%), SIA Bobrova nams (21.25%), AS Nordeka (48.09%), Tennis club Altitūde, Tennis club Prezidents, SIA Tenisa klubs JŪRA (100%) SIA Blūza klubs (50%), SIA Ajura (50%), SIA SWH Sets (22.22%) 6

7 Consolidated annual report 2006 Ivars Kalviņš, Deputy Chairman of the Council Positions held in other companies: AS Latvijas zoovetapgāde, Chairman of the Council, National research institution, non-profit organization the Latvian Institute of Organic Synthesis, Director, AS Grindeks, Member of the Council, Non-governmental organization the Foundation for Support to the latvian Academic Library, Chairman of the Board Participation in other companies: SIA OSI Laboratorijas (16%), SIA Tetra (50%), Non-governmental organization the Foundation for Support to the Latvian Academic Library, Society of Quality Tests Eļena Dudko Positions held and participation in other companies: none Guntis Belēvičs Positions held in other companies: SIA Blakenfeldes muiža, Member of the Board, SIA Divezeri, Member of the Board, SIA Centrālā laboratorija, Member of the Board, SIA Baltic Pharma Service, Member of the Board, SIA Juglas medicīnas centrs, Member of the Board, SIA Genera, Member of the Council, SIA Belēviču nekustāmie īpašumi, Member of the Board, SIA Aptieku serviss, Member of the Board, SIA Uniaptieka, liquidator, SIA Dolli 91, liquidator, Zemitāni farm in the Irši district, owner, SIA Saules aptieka, Member of the Board, Participation in other companies: Zemitāni farm in the Irši district, owner, SIA Blakenfeldes muiža (100%), SIA Divezeri (100%), SIA Genera (0,75%), SIA Maltas aptieka, SIA Aptieku serviss (50%), SIA Belēviču nekustāmie īpašumi (20%), SIA Centrālā laboratorija (51,74%), SIA AA Active (25%), SIA Baltic Pharma Service (40%) the University of Agriculture Hunting Club, Grindeļa brālība, Brazīlijas Latviešu draugu biedrība, Koknesei, Open public foundation LTVF, Riga Hansa Rotary Club 7

8 Consolidated annual report 2006 Tatjana Lukina Positions held in other companies: Non-goverment organization Pharmaceutical Association, Chairperson of the Board, The People s Harmony Party, Member of the Board, Shares in other companies: none Zigurds Jeromanovs (resigned on 30/07/2006) Positions held in other companies: SIA Taumalīta būvtehnoloģijas, Chairman of the Board, SIA Saldus rapsis, Chairman of the Board, AS Saldus labība, Chairman of the Council. Participation in other companies: SIA SIA Saldus LC, SIA Nīgrandes mednieks, SIA Saldus konservu kombināts Movements in the Board during the period 1 January 2006 through 31 December 2006 Movements in the Council during the period 1 January 2006 through 31 December 2006 Subsidiaries Armands Lapiņš, resigned 30/07/2006 Jeļena Borcova, appointed 30/07/2006 Zigurds Jeromanovs, resigned 30/07/2006 OOO Baltfarm Cheremushkinskaya 13/17 Moscow, Russia (100%) Stimfarm Ltd. Kadaka 86a-205 Tallinn, Estonia (51%) Core business activity Manufacturing and distribution of chemical and pharmaceutical products Financial year 1 January 31 December 2006 Auditors Diāna Krišjāne Sworn Auditor Certificate No. 124 SIA Ernst & Young Baltic Kronvalda bulvāris 3-5, Riga Latvia, LV 1010 Licence No. 17 8

9 Consolidated annual report 2006 Consolidated management report BASIC INFORMATION AS Olainfarm has prepared consolidated financial statements for the period 01/01/ /12/2006. In the reporting period the Group consisted of parent company AS Olainfarm and its subsidiaries OOO Baltfarm and Stimfarm Ltd. (hereinafter the Group). The core business activity of the subsidiaries is distribution of medicines produced by AS Olainfarm. The Group s consolidated profit in 2006 reached LVL (EUR ), which is a growth by LVL (EUR ) or 24% as compared to The profit previously declared at LVL (EUR ) was reduced due to establishment of additional allowances for slow-moving items. In view of the above-mentioned, the Group s earnings per share in 2006 were LVL (EUR 0.097), higher than in 2005 when earnings per share were LVL (EUR 0.089). Net consolidated profit of AS Olainfarm , , , , ,00 0, , forecast LVL EUR , , ,00 The Group s total net turnover in 2006 was LVL 16.7 million (EUR 23.7 million), rising 28% as compared to the year before. The Group s turnover was influenced mostly by increasing turnover of the parent company, which grew by more than LVL 3 million. Subsidiary OOO Baltfarm also showed net turnover growth from 2005 by LVL or 32% to LVL in OOO Baltfarm net profit during the period was LVL as opposed to a loss of LVL in

10 Consolidated annual report 2006 Consolidated sales by AS Olainfarm , , , , ,00 LVL EUR , ,00 0,00 SALES AND MARKET GROWTH forecast The above-mentioned growth of the Group s turnover is mostly related to successful choice and implementation of the marketing policy and activities of the parent company in both traditional and new sales markets. Export operations and domestic sales w ere both successful. According to IMS Health data, AS Olainfarm ranks 10 th among all the companies represented in the Latvian pharmaceuticals market by turnover in 2006 and has shown the best financial result among the domestic Latvian manufacturers. Turnover of AS Olainfarm on the Latvian market in 2006 was LVL 3.02 million (EUR 4.3 million), growing 8% as compared to The Company s share of the Latvian market reached 2.46% in AS Olainfarm demonstrated significant growth of turnover in markets in Russia, Ukraine, Belarus, Lithuania, Norway and the UK. In 2006 the parent company exported over 80% of its output. Distribution of Group s sales by markets in 2006 France 1% Lithuania 3% Kazakhstan 4% Norway 2% UK 3% Other 9% Russia 36% Poland 3% Belarus 8% Ukraine 13% Latvia 18% 10

11 Consolidated annual report 2006 In addition to existing AS Olainfarm representation offices in Russia, Kazakhstan, Belarus and Lithuania as well as cooperation partners and representatives in Poland, the US and the CIS countries, a represenation in Ukraine was opened in These representation offices, representatives and cooperation partners operate in accordance with marketing programmes that would ensure not only the stability of the company s current market position but also its further growth in future. OTHER FINANCIAL RESULTS In general, the Group continues to improve its financial stability indicators. The Group s total liquidity index has remained almost unchanged from the previous reporting period, growing from 2.26 to 2.36 in Total solvency ratio has grown from 1.01 in 2005 to 1.12 in 2006, which also suggests serious improvement of the Group s financial position. Receivables turnover ratio has also improved from 169 days in 2005 to 127 days in Return on Average Assets (ROAA) and Return on Average Equity (ROAE) have stabilized and continued growing in 22006, reaching 3.48% and 6.76% respectively. In view of the upward trend of those indicators and the Group s plans for the future, steady growth of the figures can be expected also in the coming years. It should be noted that due to the share issue made in 2006 and the share issue planned for 2007 the growth of the return on equity has stopped around 6.5% but is likely to resume already in 2008 following the planned share issue in 2007 and the respective investment. Dynamics of return on consolidated assets and equity 8,00% 6,00% 4,00% 2,00% 0,00% -2,00% -4,00% forecast ROAA ROAE -6,00% -8,00% -10,00% -12,00% TRADING OF GROUP S SHARES ON STOCK EXCHANGE From 1 December 2006, shares of the parent company AS Olainfarm are being quoted on the Official List of the Riga Stock Exchange, which suggests that stock market players have also come to appreciate rapid development of the Company recently. In the few weeks after the Riga Stock Exchange began listing AS Olainfarm shares, their price increased by more than 20% to LVL 2.50 per share. In general the price of AS Olainfarm shares on the Riga Stock Exchange was in the range between LVL 1.58 and LVL 2.5 per share in The total number of the Company shares traded on the Riga Stock Exchange in 2006 was and their annual turnover was LVL 2.72 million. 11

12 Consolidated annual report 2006 AS Olainfarm price movement on the Riga Stock Exchange from 1 January to 31 December 2006 as compared to OMX Riga index Olainfarm OMX Riga With the growing investor interest in AS Olainfarm shares, the Group s market capitalization also keeps growing fast and has increased almost fivefold since This fact reiterates trust of investors in the Company s future prospects. A/s Olainfarm market capitalization , , , ,00 LVL EUR , ,00 0, /03/2007 SUBSEQUENT EVENTS AND FORECASTS In 2006 and 2007 agreements were made about the acquisition or use of intellectual property for new original products that give AS Olainfarm greater opportunities for growth. In 2007 it is planned to continue active cooperation with international pharmaceutical companies, which involves not only production and supply of chemical and pharmaceutical products (for example, the order from Novartis Grimsby Limited, the British branch of the Swiss pharmaceutical company Novartis), but also development of products for production and supply to the world market (for example, memantine for treatment of Alzheimer s disease). 12

13 Consolidated annual report 2006 After a lengthy and serious analysis, a decision was made about the need to start production of a completely new type of finished form medicines ampoules, and to expand significantly the existing warehousing and energy capacities as well as to make important contributions to research and development. Thinking about financing of those investments, AS Olainfarm Board has proposed to the shareholders to decide on the issue of 4 million shares in 2007 to be offered to local and foreign investors. The plans about production of ampoules and expansion of existing capacities are fully consistent with the Gr oup s development strategy, which calls for further increase in sales of products by AS Olainfarm, improvement of existing products and development of new products. In 2007 the Group plans to continue working in the specified directions, achieving a turnover of LVL 21.8 million (EUR 31 million) and consolidated net profit LVL 1.37 million (EUR 1.95 million). The financial statements have been approved by the Board of the Parent Company and signed on behalf of the Board by 13 April 2007 Valērijs Maligins Chairman of the Board (President) 13

14 Consolidated annual report 2006 Consolidated income statement Notes LVL LVL Net sales Changes in stock of finished goods and work in progress Other operating income Cost of materials: raw materials and consumables ( ) ( ) other external costs ( ) ( ) ( ) ( ) Staff costs: Wages and salaries 9 ( ) ( ) Statutory social insurance contributions 9 ( ) ( ) ( ) ( ) Depreciation/ amortisation and write-offs: 11, 12 ( ) ( ) Other operating expense 5 ( ) ( ) Income from sale of subsidiary Financial income Financial expense 7 ( ) ( ) Profit before taxes Corporate income tax 8 (78 194) ( ) Profit for the reporting year Attributable to: The equity holders of the Parent Company Minority - (4 678) Profit for the reporting year Basic and diluted earnings per share The accompanying notes form an integral part of these financial statements. For the Board of the Group: Valērijs Maligins Chairman of the Board (President) 13 April

15 Consolidated annual report 2006 Consolidated balance sheet ASSETS Notes 31/12/ /12/2005 NON-CURRENT ASSETS LVL LVL Intangible assets Intangible assets Prepayments for intangible assets TOTAL Property, plant and equipment Land, buildings and constructions Equipment and machinery Other tangible assets Construction in progress Prepayments for property, plant and equipment TOTAL Financial assets Other securities and investments TOTAL TOTAL NON-CURRENT ASSETS CURRENT ASSETS Inventories Raw materials Work in progress Finished goods and goods for resale Goods in transit Prepayments for goods TOTAL Receivables Trade receivables Receivables from related companies 15, Other receivables Corporate income tax Current loans to management Prepaid expense TOTAL Cash TOTAL CURRENT ASSETS TOTAL ASSETS The accompanying notes form an integral part of these financial statements. For the Board of the Group: 13 April 2007 Valērijs Maligins Chairman of the Board (President) 15

16 Consolidated annual report 2006 EQUITY AND LIABILITIES Notes 31/12/ /12/2005 EQUITY LVL LVL Share capital Share premium Retained earnings/ (accumulated deficit): brought forward ( ) ( ) for the period TOTAL EQUITY LIABILITIES Non-current liabilities Deferred corporate income tax liabilities Loans from credit institutions Other loans Taxes payable TOTAL Current liabilities Prepayment received for shares of the Parent Company Loans from credit institutions Other loans Prepayments received from customers Trade and other payables Payables to related companies Taxes payable Accrued liabilities TOTAL TOTAL LIABILITIES TOTAL EQUITY AND LIABILITIES The accompanying notes form an integral part of these financial statements. Commitments and contingencies: see Note 27. For the Board of the Group: 13 April 2007 Valērijs Maligins Chairman of the Board (President) 16

17 Consolidated annual report 2006 Consolidated cash flow statement LVL LVL Cash flows to/ from operating activities Profit before taxes Adjustments for: Amortisation and depreciation Disposal of tangible non-current assets and investments Decrease in allowances ( ) Increase in vacation reserve Impairment of tangible non-current assets (17 103) Interest expenses Unrealised (gain)/ loss from fluctuations of currency exchange rates (1 701) Operating cash flows before working capital changes (Increase) in inventories ( ) ( ) (Increase) in receivables and prepaid expense ( ) ( ) Increase in payables and prepayments Cash generated from operations Interest paid ( ) ( ) Corporate income tax paid (16 865) (45 602) Real estate tax paid (65 807) ( ) Net cash flows to/ from operating activities Cash flows to/ from investing activities Purchase of non-current assets ( ) ( ) Loans granted ( ) (49 176) Net cash flows to/ from investing activities ( ) ( ) Cash flows to/ from financing activities Proceeds from issue of shares Borrowings repaid ( ) ( ) Proceeds from borrowings Net cash flows to/ from financing activities ( ) Net change in cash (19 056) Cash at the beginning of the reporting year Cash at the end of the reporting year The accompanying notes form an integral part of these financial statements. 17

18 Consolidated annual report 2006 Consolidated statement of changes in equity Share capital Share premium Retained earnings/ (accumulated deficit) Total Minority Total equity Balance as at 31 December ( ) ( ) Profit for the reporting year (4 678) Disposal of subsidiary Balance as at 31 December ( ) Issue of share capital Profit for the reporting year Balance as at 31 December The accompanying notes form an integral part of these financial statements. 18

19 1. Corporate information The principal activities of Olianfarm Group (hereinafter, the Group) are manufacturing and distribution of chemical and pharmaceutical products. The Parent Company of the Group, AS Olainfarm (hereinafter, the Parent Company) was registered with the Republic of Latvia Enterprise Register on 10 June 1991 (re-registered on 27 March 1997) and with the Republic of Latvia Commercial Register on 4 August The shares of the Parent Company are listed on Riga Stock Exchange, Latvia. These consolidated financial statements were approved by the Board on 13 April The Parent Company s shareholders have the power to amend the consolidated financial statements after the issue. 2. Summary of significant accounting policies Basis of preparation For all periods up to and including the year ended 31 December 2005, the Group prepared its consolidated financial statements in accordance with local generally accepted accounting practice (Local GAAP). These consolidated financial statements, for the year ended 31 December 2006, are the first the Group has prepared in accordance with International Financial Reporting Standards (IFRS), as adopted by the European Union (EU). IASB has issued IFRS No. 1 First-time Adoption of International Financial Reporting Standards ( IFRS 1 ). IFRS 1 requires that an entity s first IFRS financial statements are the first annual financial statements in which the entity adopts all IFRSs, by an explicit and unreserved statement in those financial statements of compliance with IFRS. IFRS 1 requires that the Group recognize all assets and liabilities that meet the recognitions criteria of IFRS and measure these assets in accordance with each IFRS, with the prior period financial information recognised based on the same criteria. The Group has prepared consolidated financial statements which comply with IFRS applicable for period beginning on or after 1 January 2006 as described in the accounting policies. In preparing these consolidated financial statements, the Group opening balance sheet was prepared as at 1 January 2005, the Group s date of transition to IFRS. There are no principal adjustments made by the Group in restating its Local GAAP balance sheet as at 1 January 2005 and its previously published Local GAAP consolidated financial statements for the year ended 31 December IFRS 1 allows first-time adopters certain exemptions from the general requirements to apply IFRS as effective for December 2006 year end retrospectively. The Group has applied the following exemptions: IFRS 3 Business Combinations has not been applied to acquisitions of subsidiaries that occurred before 1 January 2005; Cumulative currency translation differences for all foreign operations are deemed to be zero as at 1 January The Group has not applied the following IFRS and Interpretations that have become effective but are not yet mandatory: IFRS 7 Financial Instruments: Disclosures (mandatory for financial years beginning on or after 1 January 2007), IFRS 8 Operating Segments (effective after endorsed by the European Union, but no earlier than 1 January 2009), Amendment to IAS 1 Presentation of Financial Statements Capital Disclosures (mandatory for financial years beginning on or after 1 January 2007), IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies (mandatory for financial years beginning on or after 1 March 2006), IFRIC 8 Scope of IFRS 2 (mandatory for financial years beginning on or after 1 May 2006), IFRIC 9 Reassessment of Embedded Derivatives (mandatory for financial years beginning on or after 1 June 2006), IFRIC 11 IFRS 2 Group and Treasury Share Transactions (effective after endorsed by the European Union, but no earlier than 1 March 2007), IFRIC 10 Interim Financial Reporting and Impairment (effective from 1 November 2006), IFRIC 12 Service Concession Arrangements (effective after endorsed by the European Union, but no earlier than 1 January 2008), the amendments of IAS 23 Borrowing costs (mandatory for financial years beginning on or after 1 January 2009). The Group expects that the adoption of the pronouncements listed above will have no significant impact on the Group s financi al statements in the period of initial application, except for IFRS 7 Financial Instruments: Disclosures; IAS 1 amendment Capital

20 2. Summary of significant accounting policies (cont d) Basis of preparation (cont d) Disclosures, IFRS 8 Operating Segments and the amendments of IAS 23 Borrowing costs. The Group is still estimating the impact of adoption of these pronouncements on the financial statements. The consolidated financial statements are prepared under the historical cost convention as modified by the revaluation of ava ilablefor-sale investments. Balances disclosed as at 31 December 2006 reflect the position as at the close of business on that date. Reporting currency and units of measurement The monetary unit used in the consolidated financial statements is lat (LVL), the monetary unit of the Republic of Latvia. Basis of consolidation As at 31 December 2006, the Parent Company had investments in the following subsidiaries: Name Country Business Date of acquisition Group s equity interest (%): OOO Baltfarm Russia Distribution of products 2 January Stimfarm Ltd. Estonia Distribution of products 2 January The financial statements are consolidated in the Group s financial statements on a line by line basis by adding together like items of assets and liabilities as well as income and expenses. The consolidated financial statements include subsidiaries that are controlled by the Parent Company. Control is presumed to exist where more than a half of the subsidiary s voting rights are controlled b y the Parent Company or it otherwise has the power to exercise control over the operations. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases. The financial statements of the subsidiaries are prepared for the same reporting year as the P arent Company, using consistent accounting policies. Purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of acquisition is measured as the fair value of assets given, equity instruments issued and liabilities incurred or assumed at the acquisition date, plus any costs directly attributable to the acquisition. The acquisition date is the date on which the acquirer effectively obtains control of the acquiree. The excess of the cost over the fair value of the assets, liabilities and contingent liabilities acquired is recorded as goodwill (see Note 11). For the purposes of consolidation, unrealised internal profits, intra-group balances, intra-group shareholdings, dividends and other intra-group transactions are eliminated from the Group s financial statements. Minority interest is calculated with regard to those entities that are fully consolidated while not being fully owned by AS Olainfarm. Estimates and assumptions The preparation of consolidated financial statements in conformity with IFRS requires the management to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses, and disclosure of contingencies. Th e significant areas of estimation used in the preparation of the accompanying consolidated financial statements relate to depreciation, allowances for doubtful receivables and inventories, and impairment evaluation. Although these estimates are based on the management s best knowledge of current events and actions, the actual results may ultimately differ from those estimates. Foreign currency translation The functional and reporting currency of companies of the Group is the Lat (LVL). All transactions denominated in foreign currencies are converted into Lats at the Bank of Latvia rate of exchange prevailing on the day the transaction took place. Gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. At the year end foreign currency financial assets and liabilities are translated at the Bank of Latvia rate of exchange ruling at 31 December, and all associated exchange differen ces are dealt with through the income statement. 20

21 2. Summary of significant accounting policies (cont d) Foreign currency translation (cont d) Exchange rates against the USD and EUR in the last two years have been: 31/12/ /12/2005 EUR USD As at the reporting date, the assets and liabilities, both monetary and non-monetary, of the foreign subsidiary are translated into the presentation currency of the Group at the rate of exchange rulling at the balance sheet date and the income statements are translated at the weighte average exchange rates for the year. Resulting exchange differences are classified as separate component of equity. Intangible non-current assets Intangible assets consist of goodwill recognised on the acquisition of Group subsidiaries and other intangible assets. Positive goodwill resulting from acquisition of subsidiaries represents the excess of the cost of the acquisition over the total value of the assets, liabilities and contingent liabilities acquired. Other intangible assets basically consist of the costs of acquisition of preparation production technologies, medicine registration fe e and software. Other intangible assets are stated at cost and amortised over their estimated useful lives on a straight-line basis. The amortisation rate for other intangible assets is fixed as follows: 20% for production technologies and 20-25% for other intangible non-current assets. The carrying values of intangible non-current assets are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable, except for the impairment of goodwill that is being carried out annually. Losses from impairment are recognised where the carrying value of intangible non-current assets exceeds their recoverable amount Research and development costs Research costs are expensed as incurred. Development expenditure incurred on an individual project is carried forward when it s future recoverability can reasonably be regarded as assured and all other criteria of IAS 38 Intangible assets are met. Any expenditure carried forward is amortised over the period of expected future sales from the related project. The carrying value of development costs is reviewed for impairment annually when the asset is not yet in use, and otherwise when events or changes in circumstances indicate that the carrying value may not be recoverable. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and any impairment in value. Land is not depreciated. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset: % per annum Buildings and constructions 5 Equipment and machinery Computers and software 25 Other tangible assets 20 Depreciation is calculated starting with the following month after the tangible non-current asset is put into operation or engaged in commercial activity. Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item is depreciated separately. To the extent that the Group depreciates separately some parts of plant, property and equipment, it also depreciates separately the remainder of the item. The remainder consists of the parts that are individually insignificant. The depreciation for the remainder is determined using approximation techniques to faithfully represent its us eful life. When tangible non-current assets are sold or disposed of, their cost and accumulated depreciation are elim inated from the accounts and any gain or loss resulting from their disposal is included in the income statement. 21

22 2. Summary of significant accounting policies (cont d) Property, plant and equipment (cont d) The cost of property, plant and equipment comprises its purchase price, including import duties and non-refundable purchase taxes and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expense s incurred after the non-current assets have been put into operation, such as repair and maintenance and overhaul costs, are normally charged to the income statement in the period when incurred. The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets are written down to their recoverable amount. Construction in progress represents property, plant and equipment under construction and is stated at historical cost or as appropriate. This includes the cost of construction and other direct expenses. Construction in progress is not depreciated as long as the respective assets are not completed and put into operation. Inventories Inventories are valued at the lower of net realisable value and cost. Costs incurred in bringing each product to its present location and conditions are accounted for as follows: Raw materials acquisition cost on an average weighed cost basis; Finished goods and work-in-progress cost of direct materials and labor plus indirect costs related to production. Indirect production costs consist of labour, energy, depreciation and other production-related expense calculated based on the ordinary production output. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion an d the estimated costs necessary to make the sale. An allowance for obsolete inventories is established based on the review and analysis of individual items. Impairment of inventories caused by obsolescence and physical damage is assessed by the Group on a regular basis, and the respective losses are charged to the income statement as cost of sales. Where damaged inventories are physically destroyed, the value of inventories and the respective allowances are written off. Trade and other receivables Trade and other receivables are carried at original invoice amount less an allowance for any non-collectable amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable, evaluating each receivable separately. Bad debts are written off when recovery is deemed impossible. Cash Cash comprises cash at bank and on hand, and short-term deposits with an original maturity of three months or less. Accruals and deferrals Accruals and deferrals are recorded to recognise revenues and costs as they are earned or incurred. Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all of provisions to be reimbursed, for example, under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre -tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a borrowing cost. 22

23 2. Summary of significant accounting policies (cont d) Loans and borrowings All loans and borrowings are initially recognised at fair value, net of transaction costs incurred. After initial recognition, loans and borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest rate method. Gains and losses are recognised in the income statement as interest income/ expense when the liabilities are derecognised as well as through the amortisation process. Leases Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments, by respective charge to current and non-current liabilities. Lease payments are apportioned between the finance charges and reduction of the principal lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income. If there is reasonable certainty that the lessee will obtain ownership by the end of the lease term, the period of expected use is the useful life of the asset; otherwise capitalised leased assets are depreciated over the shorter of the estimated useful life o f the asset or the lease term on a straight-line basis. Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognised as an expense in the income statement on a straight-line basis over the lease term. The commitments undertaken by the Group with respect to operating lease contracts are recorded as off-balance sheet liabilities. Factoring Proceeds received in accordance with factoring agreements are recognised as advances from the factoring company when the Group remains exposed to the credit risk associated with the respective debtor. When the derecognition criteria from IAS 39 are not met, the proceeds are directly netted against the respective debtor balance. Revenue Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: Sale of goods Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and the amount of revenue can be measured reliably. Rendering of services The value of services rendered basically comprises revenue from water treatment services. Revenue is recognised in the period when the services are rendered. Interest Revenue is recognised on an accrual basis. Corporate income tax Corporate income tax includes current and deferred taxes. Current corporate income tax is applied at the rate of 15% on taxab le income generated by the Company during the taxation period. Deferred corporate income tax arising from temporary differences in the timing of the recognition of items in the tax returns and these financial statements is calculated using the liability method. The deferred corporate income tax asset and liability are determined on the basis of the tax rates that are expected to apply when the timing differences reverse. The principal tempor ary timing differences arise from differing rates of accounting and tax amortisation and depreciation on the non-current assets, the treatment of temporary non-taxable provisions and reserves, as well as tax losses carried forward for the subsequent five years. 23

24 2. Summary of significant accounting policies (cont d) Related parties Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the party in making financial and operating decisions. The related parties in this report consist of the Group s management, shareholders, and the entities belonging to the Group. The pricing policy for the related parties does not differ materially from the usual pricing policy of the Group. Contingencies Contingent liabilities are not recognised in these financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognised in these financial statements but disclosed when an inflow of economic benefits is probable. Subsequent events Post-year-end events that provide additional information about the Group s position at the balance sheet date (adjusting events) are reflected in the financial statements. Post-year-end events that are not adjusting events are disclosed in the notes when material. Earnings per share Earnings per share are calculated by dividing the net profit after taxation for the year by the average number of ordinary sh ares in issue during the year. The average number of shares in issue during the year is weighted to take into account the timing of the issue of new shares. 24

25 3. Net sales By business segments Finished form medicine Chemicals TOTAL: By geographical segments CIS Latvia Europe Baltic states (Lithuania and Estonia) Other TOTAL: Other operating income Sale of current assets Treatment of waste water Income from catering services Lease of premises Other operating income TOTAL: Other operating expense Marketing expense Transportation expense Sales commissions Fairs expense Expert analyses of medicines Other selling expenses Total selling expense: Impairment of goodwill related to subsidiaries Business trips Write-offs of current assets Current repairs New product research and development costs Insurance Legal and audit fees Write-offs and disposal of tangible assets

26 5. Other operating expense (cont d) Communication expense Audit of suppliers Car fleet maintenance Information and business consulting Office rent expense Write-offs of bad debts Representation expense Allowances for slow-moving items Impairment of tangible assets Bank charges Education expense Social infrastructure expense Allowances to employees Flowers and gifts expense Security expense Hosting expense Medicine import and export permits Land lease for eco-field Donations Humanitarian aid Office expense Waste disposal Inventorying of buildings Theft of goods in transit Laboratory tests Visas, invitations expense Membership fees Administrative office maintenance Unemployment risk duty Allowances for doubtful receivables, established/ recovered* ( ) Other operating expense Other taxes TOTAL: * In 2006, allowances for doubtful receivables were reduced due to full recovery of those debts (see Note 14, 15, 16). 26

27 6. Financial income Interest income on loans Interest accrued on bank account balances Currency exchange gain, net TOTAL: Financial expense Loan interest expenses Currency exchange loss, net Currency exchange commission Penalties paid TOTAL: Corporate income tax Corporate income tax: Current corporate income tax charge for the year Deferred corporate income tax due to changes in temporary differences Charged to the income statement: Deferred corporate income tax: Deferred corporate income tax liability Accelerated depreciation for tax purposes ( ) ( ) Gross deferred corporate income tax liability ( ) ( ) Deferred corporate income tax asset Allowances for slow-moving items Vacation pay reserve Gross deferred corporate income tax asset Net deferred corporate income tax (liability): ( ) ( ) 27

28 8. Corporate income tax (cont d) Actual corporate income tax charge for the reporting year, if compared with theoretical calculations: Profit before taxes Tax at the applicable rate of 15% Permanent differences including: Non-recoverable allowances ( ) Other Deferred corporate income tax asset recognised in the reporting year which had not been recognised in the previous years (50 190) (74 938) Actual corporate income tax for the reporting year: Staff costs and number of employees Wages and salaries Vacation pay reserve Statutory social insurance contributions Management of the Group TOTAL: Wages and salaries Vacation pay reserve Statutory social insurance contributions Board Members Wages and salaries Vacation pay reserve Statutory social insurance contributions Council Members Wages and salaries Statutory social insurance contributions TOTAL: Average number of employees during the reporting year

29 10. Basic and diluted earnings per share Earnings per share are calculated by dividing the net result for the year after taxation attributable to shareholders by the weighted average number of shares in issue during the year. The table below presents the income and share data used in the computations of basic earnings per share: Net result attributable to shareholders Weighted average number of ordinary shares* Earnings per share No of shares as beginning of respective year /08/2006 issued registered shares No of shares at the year end Weighted average No of ordinary shares* * The average number of shares in issue during the year is weighted to take into account the timing of the issue of new shares. The Parent Company has no potential dilutive ordinary shares and therefore diluted earnings per share are the same as the bas ic earnings per share. 11. Intangible assets Goodwill Production technologies* Other intangible assets TOTAL Acquisition value as at 31/12/ Additions Write-offs ** ( ) - ( ) ( ) Acquisition value as at 31/12/ Additions Disposals - - (46 130) (46 130) Acquisition value as at 31/12/ Accumulated amortisation as at 31/12/ Amortisation Write-offs of goodwill** ( ) - - ( ) Impairment *** Amortisation of disposals - - ( ) ( ) Accumulated amortisation as at 31/12/ Amortisation**** Amortisation of disposals - - (46 130) (46 130) Accumulated amortisation as at 31/12/ Net carrying amount as at 01/01/ Net carrying amount as at 31/12/ Net carrying amount as at 31/12/ * Production technologies comprise chemical and pharmaceutical products technologies acquired by the Parent Company. Despite introduction of those technologies being behind the initial schedule due to objective reasons and the fact that so far only o ne product has been delivered, the Parent Company management believes that implementation of those projects and economic benefits to result from them is likely. ** Due to the poor performance, the shares of subsidiary ZAO Aroma - Peterburg were sold in *** Due to the poor performance of OOO Baltfarm, the goodwill was fully impaired in the year **** see Note

30 11. Intangible assets (cont d) Prepayments for intangible assets as at 31 December 2006, amounting to LVL (2005: LVL ), mostly represent payments for patent applications for two new products and registration of medicines abroad. The Parent Company expects to be issued patents in autumn 2007 and plans to begin production and sale of the respective products from The Group s management is certain that there are no obstacles to obtaining the patents and the production of the said products will begin in due time. According to the estimates by the management, full return on investments into one of the products is expected within the period of three years, and full return on investments into the other product is likely within five years from commencement of the production. 12. Property, plant and equipment Land Buildings and constructions Equipment and machinery Other tangible assets Construction in progress TOTAL Acquisition value as at 01/01/ Elimination (28 720) - (28 720) 2005 Additions Disposals - (38 013) (96 235) (34 834) - ( ) Acquisition value as at 31/12/ Additions Disposals - ( ) ( ) (5 852) - ( ) Acquisition value as at 31/12/ Accumulated depeciation as at 01/01/ Elimination (18 460) - (18 460) 2005 Depreciation Depreciation of disposals - (30 942) (65 771) (9 319) - ( ) Accumulated depreciation as at 31/12/ Depreciation** Depreciation of disposals - ( ) (67 682) (4 522) - ( ) Impairment Accumulated depreciation as at 31/12/ Net carrying amount as at 01/01/ Net carrying amount as at 31/12/ Net carrying amount as at 31/12/ * In 2005, the Parent Company introduced the component method of accounting for its property, plant and equipment. Therefore, several items were reclassified. ** As depreciation of the property, plant and equipment in the cafe and the canteen was disclosed in the income statement as oth er operating expense, there is a difference of LVL between total depreciation and amortisation under the income statement (LVL ) and the total depreciation and amortisation stated in Notes 11 and 12. A number of property, plant and equipment items that have been fully depreciated are still used in operations. The total original cost value of this property and equipment at the end of the year was LVL (2005: LVL ). The book value of the land owned by the Group is LVL , whereas the total cadastral value of land owned by the Group as at 31 December 2006 is LVL (2005: LVL ). The cadastral value of buildings owned by the Group companies as at 31 December 2006 had not been determined. 30